The U.S. dollar has become the dog of the foreign exchange market and we expect the EUR/USD to continue rallying after a short pullback. The USD eked out only small gains against only the CAD and AUD on Thursday and experienced substantial declines against EUR, GBP and JPY. The market is beginning to grab hold of a theme that the U.S. economy will underperform expectations. Although we have seen a slight rebound from the dollar early on Friday, the overarching theme remains.
The trigger for the sudden surge in USD selling was Wednesday’s minutes of the June 22-23 meeting. In them, the Fed lowered growth forecasts and said the U.S. economy may not fully recover for 5-6 years from the Great Recession of 2007-09. Richmond Fed President Jeffrey Lacker, who is usually optimistic, even allowed that the U.S. will recover “perhaps at a pace that is less robust than has been typical of past recoveries.” Financial regulation reform, which passed on Thursday, is also making the U.S. a less competitive hub of global finance.
At the same time, the focus is shifting away from Europe. A recent sovereign downgrade of Portugal by Moody’s elicited hardly a blip in the forex market. On Thursday a successful Spanish bond sale further reinforced that a euro breakup and sovereign defaults are no longer a pressing concern.
The huge rally in EUR/USD yesterday pushed the euro above the 100-day and 100-month moving averages and points to a continued recovery in the euro. Expect the consolidation that has begun in Asia to continue as the week comes to a close. The RSI isn’t overbought and there is plenty of technical fuel for a rally but the odds favour intraday shorts on Friday.
